How TD helped Canadian Natural pull off blockbuster purchase of Shell oilsands’ assets

Canadian Natural Resources Ltd. has a long history of making smart, well-timed acquisitions and its March 9 purchase of most of Royal Dutch Shell plc’s oilsands business in Alberta confirmed Canada’s largest oil producer knows how to package a good one.

The Calgary-based company’s stock surged 10 per cent when it announced transactions worth $12.74 billion to purchase a 70 per cent interest in the Athabasca Oil Sands Project, as well as Shell’s and Marathon Oil Corp.’s in situ oilsands interests, substantially increasing its oilsands presence.

It was the single largest oil exploration and production asset deal ever done in Canada up to that time — and one of 2017’s most significant transactions.

The market loved it because it was conservatively financed and gave Canadian Natural increased scale and sustainability from long-life assets, said TD Securities’ Robert Mason, managing director of investment banking, and Greg Hickaway, managing director of corporate credit origination, who worked on the deal and led the transaction’s debt financings.

It helped that the transaction-involved equity issued to Shell, which meant Canadian Natural’s credit risk profile didn’t change; that it didn’t have complexities like contingent asset sales; and that there was limited competition for those assets, the TD bankers said in interviews.

The transaction took many by surprise. Shell was one of oilsands’ first big believers and the AOSP a massive mining operation integrated with an upgrader and a trail-blazing carbon capture plant. Until the latest oil price downturn, Shell regarded the Alberta deposits as a core business and a top growth area.

But its priorities changed after the Anglo Dutch major acquired BG Group in 2016 for US$56 billion to bolster its liquefied natural gas business, which led to a US$30 billion divestiture program to reduce debt.

“It’s probably fair to say that a number of European companies have determined that oilsands are less strategic to them in the last couple of years especially given the Paris Accord (to reduce global greenhouse gas emissions) and the focus those companies have in meeting CO2 obligations,” Mason said.

A mechanical wild bird deterrent sits on the edge of oil sands pit at a one of the Albian Sands’ mines.

Statoil ASA, Total SA, ConocoPhillips, Murphy Oil Corp. also retreated from the oilsands, while Canadian Natural joined Suncor Energy Inc., Cenovus Energy Inc., and Athabasca Oil Corp. in expanding aggressively, leading to the Canadianization of the sector.

In a two-step transaction, Canadian Natural and Shell acquired 20 per cent of AOSP from Marathon Oil. Shell then sold 60 per cent of AOSP to Canadian Natural. Canadian Natural ended up with 70 per cent, Shell retained 10 per cent and Chevron Corp. kept its 20 per cent.

Shell was issued 97.5 million new Canadian Natural shares worth about $4 billion at the time as part of its payment, and is expected to eventually sell the shares.

Shell “had a desire to receive part of the compensation in the form of CNRL shares, and one of the benefits to them was that in the event that oil prices rallied significantly post the transaction, it would allow them to participate in some of the upside,” Mason said.

The TD bankers were brought in about six weeks prior to the deal’s announcement, after Canadian Natural executives had nailed down many key terms.

The bankers immediately mobilized to line up internal approvals. Work on the deal was contained to no more than 10 people in Calgary, Toronto and New York, to ensure confidentiality.

“We were very happy to get a shot at such an important opportunity and moved mountains internally to do what we could to meet the clients’ needs on a very expedited basis,” Mason said. “Winning this marquee mandate was a huge breakthrough within TD.”

On the other side of the transaction, JPMorgan Chase Bank and Scotiabank advised Shell.

TD acted as the sole underwriter and bookrunner on $9 billion in acquisition financing, including a $6 billion bridge loan facility and a $3 billion term loan facility. It was the largest sole bank debt underwriting ever committed to in Canada.

Within a week of the announcement, TD rolled out a general syndication to the market at large. The debt was offered first to institutions that were already working with Canadian Natural.

Despite a movement to discourage oilsands investments, the syndication effort was “a tremendous success” with a combination of Canadian, U.S. and Asian banks, said Hickaway, even as European banks declined to participate.

“We had no difficulty in syndicating the full $9 billion,” Hickaway said. “TD and the other Canadian banks remain committed to energy, it’s a critical part of our franchise and of the Canadian economy, and we remain in support of it, Canadian Natural and other key names.”

Despite a movement to discourage oilsands investments, the syndication effort was ‘a tremendous success’ with a combination of Canadian, U.S. and Asian banks

Oilsands transactions dried up after Cenovus announced a similar deal at the end of March to purchase for $17.7 billion the 50 per cent of the Foster Creek and Christina Lake in situ oilsands projects it didn’t already own from partner ConocoPhillips, plus Deep Basin conventional assets in Alberta and British Columbia.

That deal was not as well received as it involved taking on a large debt load and major asset sales, and the company’s stock tumbled. Cenovus has aggressively sold non-core assets since then and recently announced a continuation of layoffs under a new CEO.

Still, the transactions meant a busy time for advisers and brokers last year. Kinder Morgan Canada Ltd. added to the activity with its $1.75 billion IPO, made through a syndicate of underwriters co-led and jointly bookrun by TD Securities and RBC Capital Markets.

A further $10 billion in oilsands properties could be up for sale, excluding corporate transactions, according to Peters & Co. analysts.

“Although the motivations for divesting oilsands assets have varied, key themes among the sellers have been to: improve balance sheets (lower debt), focus capital on short-cycle objectives, and reduce exposure to perceived higher cost/carbon barrels,” Peters analysts said in a recent report.

TD’s Mason says global majors still in the business are not in a rush to sell in the current weak market even if they don’t regard their oilsands holdings as strategic. He expects Canadian operators, both big and small, to further consolidate their positions if assets become available.